Materia
Gobierno Corporativo
“Gamestop case study”
Docente
Mtro. Leobardo Quiroga
Alumnas:
Maria Cristina Gutiérrez Villalobos
Ana María León Candiani
Ana Karen Cisneros López
Karen Fernanda Gallegos Buchanan
Laisha Gonzalez Atilano
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Introduction to GameStop Case:
● Provide a brief summary of the GameStop case.
The GameStop affair of early 2021 sparked an unprecedented rise in the
stock price of video game retailer GameStop (GME), fueled by a group of
retail investors organized through online forums. Despite GameStop's
worsening financial performance since 2017, its stock price skyrocketed from
$4 to $325 per share. This rise caused a brief squeeze, leading to significant
losses for hedge funds and institutional investors who had bet against
GameStop's success. The event highlighted the power of social media and
online communities to influence stock prices, as well as the challenges and
controversies surrounding market manipulation, short selling and the role of
trading platforms. The GameStop case sparked debates about market
regulation, the democratization of investment and the dynamics between
individual and institutional investors.
● What were the key events that unfolded during this case?
○ Short Squeeze: As GameStop's stock price continued to rise, it
triggered a short squeeze. Short sellers, who had bet on the stock's
decline, were forced to buy back shares at higher prices to cover their
positions, further driving up the stock price.
○ Initial Surge in GameStop Stock Price: GameStop's stock price began
to surge in late January 2021, rising from around $20 to over $400 per
share at its peak.
○ Trading Platform Restrictions: Amidst the volatility, trading platforms
like Robinhood temporarily restricted trading in GameStop and other
stocks caught up in the frenzy, citing risk management concerns. This
move sparked outrage among retail investors and led to allegations of
market manipulation and collusion.
○ Congressional Hearings and Regulatory Scrutiny: The GameStop saga
attracted widespread attention from lawmakers, regulators, and the
media.
○ Market Volatility and Aftermath: Following the peak of the GameStop
frenzy, the stock's price experienced significant volatility and eventually
began to decline.
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Key Players
The main players involved in the GameStop case were:
● 1. Retail Investors: Individual investors, often organized through
online platforms, who collectively bought shares of GameStop stock, primarily
to challenge hedge funds that had heavily shorted the stock.
● 2. Hedge Funds: Institutional investors that had significant short
positions in GameStop, betting that its stock price would decline. They faced
losses when the stock price surged due to the retail investors' coordinated
buying.
● 3. Brokerages: Platforms used by retail investors to buy and
sell stocks. Some brokerages, notably Robinhood, temporarily restricted
trading in GameStop and other heavily shorted stocks during the peak of the
volatility, citing risk management concerns.
● 4. Regulators: Regulatory bodies responsible for overseeing
financial markets and ensuring fair and orderly conduct. They monitored the
situation and investigated any potential market manipulation or regulatory
breaches.
● 5. Congress: U.S. lawmakers held hearings to
investigate the events surrounding the GameStop saga, particularly focusing
on the role of online forums like Reddit, hedge funds, and brokerages in the
market volatility.
Each of these players had different roles and interests. Retail investors aimed to
profit from their investments and challenge the dominance of institutional investors.
Hedge funds sought to minimize losses from their short positions. Brokerages aimed
to manage risk and maintain market stability. Regulators aimed to uphold market
integrity and protect investors, while lawmakers sought to understand the
implications of the event and potentially enact reforms to prevent similar situations in
the future.
Market Dynamics
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● Describe the significant fluctuations in GameStop's stock price during the
case
During the GameStop case, there were significant and unprecedented fluctuations in
the stock price. The price of GameStop shares experienced a remarkable increase
from a low of 4 per share to a high of 325 per share within a short period. This surge
in stock price was driven by a combination of factors, including the influence of retail
investors organizing through platforms like Reddit, the actions of short sellers
covering their positions in a short squeeze, speculation and rational bubbles in the
market, and institutional responses to the volatile situation. These factors contributed
to the extreme volatility in GameStop's stock price, making it a focal point of attention
in the financial world during the case.
● What factors contributed to the extreme volatility?
Retail Investor Frenzy: Retail investors, organized through social media platforms
like Reddit, coordinated to buy GameStop shares en masse. This sudden surge in
demand from individual investors, often referred to as a "Reddit army," significantly
impacted the stock price 2.
Short Squeeze: Wall Street short sellers had heavily shorted GameStop stock,
betting on its decline. However, when retail investors and opportunistic traders
started buying shares, it triggered a short squeeze. Short sellers were forced to
cover their positions by buying shares at inflated prices to limit their losses, further
driving up the stock price 2.
Speculation and Rational Bubble: The influx of speculators and individuals caught
up in the hype around GameStop's stock created a sense of irrational exuberance,
leading to increased buying pressure and contributing to the extreme price volatility
Institutional Reactions: Institutional investors, facing significant losses due to the
rapid increase in GameStop's stock price, took actions to mitigate their exposure.
These reactions, such as restricting trading or implementing risk management
strategies.
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Market Dynamics: The interplay between various market participants, including
retail investors, institutional investors, short sellers, and speculators, created a
complex and volatile environment for GameStop's stock. The rapid and
unpredictable nature of these interactions further fueled the extreme fluctuations in
the stock price
● What are the potential risks associated with the events that unfolded in the
GameStop case?
One risk is the potential for market manipulation, where a group of traders
collaborates to artificially inflate or deflate the price of a stock for their own gain.
Another risk is the impact on market stability. Sudden and extreme price movements,
like those seen in the GameStop case can make the investors feel not sure if
investing is a good idea.
No regulations can make millions of people lose all their money.
● How can investors manage risks in a dynamic market?
Investors can follow diverse strategies:
- Diversification is a key principle, as spreading investments across different asset
classes, industries, and geographic regions can help reduce the impact of any single
event on a portfolio.
-By doing research, understanding the fundamentals of the companies or assets
being considered, as well as the broader market and economic conditions.
-Setting clear investment goals and maintaining a long-term perspective can also
help manage risks, having a well-defined investment plan and sticking to it.
Ethical Considerations:
● What lessons can be learned about ethical investing? KAREN
-Transparency and responsibility are fundamental pillars in ethical investment.
Investors should thoroughly understand the companies in which they invest and act
with integrity to avoid risky or unethical financial practices.
-Social networks like Reddit burst into the financial market with the GameStop saga,
evidencing their power to influence stock prices. While these platforms can be useful
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tools for information and collaboration, they also carry risks of manipulation and
dissemination of false information.
-Investors should be aware of these risks and use social media responsibly.
Financial education is essential so that retail investors, many of whom participate
without the necessary experience, can make informed decisions.
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